Total Assets vs. Market Capitalization

 

Market Capitalization vs. Total Assets

1. Overview

You can measure the size of the company in many respects. The most important measures are market capitalization and total assets.

Market capitalization is determined by multiplying the total number of outstanding shares with the market price per share.

Market Capitalization helps you measure the relative size of the company with respect to other companies.

Total assets imply cash, and cash equivalents as well as investment in other assets that yields cash, cash equivalents.

Market capitalization and total assets both help you determine whether the company’s stock is correctly priced or not.

2. Total Assets-Meaning

International Financial Reporting Standard (IFRS) defines an asset as a present economic resource controlled by an entity as a result of past events.

An economic resource is a right that has the potential to generate future economic benefits.

Future economic benefits imply an expected increase in revenue and or, reduction in cost.

Total assets are classified into Current Assets and Non-current Assets.

An asset is classified into Current Assets when it satisfies any of the following criteria:

a) It is expected to be realized in, or is held for sale or consumption in, the normal course of the entity’s operating cycle; or

b) It is held primarily for trading purposes or for the short term and is expected to be realized within twelve months of the balance sheet date.

c) It is cash and cash equivalent which is not restricted in its use for at least twelve months after the reporting date.

Examples of Current Assets include inventory, accounts receivable, supplies, prepaid rent, investment in Treasury Bills, etc.

 All other assets shall be classified as Non-current Assets. Examples of Non-current Assets include buildings, manufacturing facilities, land, plant and machinery, office equipment, long-term investment in stocks and other securities, and most intangible assets such as patents and goodwill.

 Total assets represent the combined value of all assets owned by a company.

 You can find this number on the company’s financial statements.

3. What do Total Assets fail to indicate?

From total assets, you can get an idea about the size of the company but this measurement is not all in all.

Many companies have substantial intangible assets that do not appear on the statement of financial position because there’s no objective way to measure their value in the Financial Reporting Frameworks.

You can take the example of Mickey Mouse. The trademark for Mickey Mouse is worth billions of dollars to The Walt Disney Company. Its value cannot be measured fairly and reliably under the current prevalent Reporting Standards.

However, the current realizable value of the trademark in the market could be considered as an objective value. This value does not appear in the statement of financial position and is thus not included in the total assets.

In addition, the accounting conventions do not permit the companies to increase the value of non-current assets beyond the price paid for them.

Total assets do not represent the value of the company as the company’s liabilities are not taken into account.

You can not assign the same value to the company that has the same total assets but different amounts as liabilities.

The following table will help you understand this:

	Company A	Company B
Total Assets ($ billion)	100	100
Total Liabilities ($ billion)	75	120
Net Assets	25	-20

Here, the net assets of company A are $25 billion while for B are negative by $20 billion.

Company B would be in the state of insolvency.

Now, you can conclude, with the total assets you cannot measure how the company is making the use of its assets for generatrung future econimic benefits.

For this, analytical methods such as asset turnover ratios or inventory turnover ratios might be useful.

You can read more about ratios here

Determinants of financial performance of banks

Cash flow ratios

Indicators for profitable portfolios

4. Market Capitalization-Meaning

For Market Capitalization meaning Click here

5. What does Market Capitalization indicates?

Market Capitalization indicates the current price you assign to the company.

You have to value the assets of the company at current value and deduct the external liabilities owed to the company.

Other factors that affect the market cap are the company’s earning rate, growth rate, and dividend rate.

A company’s market cap is not as same as the company’s market value.

The market value represents the price you would be required to pay to buy the entire company.

A company’s market cap will always be different from its net assets.

You can calculate net assets by deducting the total liabilities from the total assets as shown in the above table.

Market cap is directly related to the stock price as of today and it takes into account things that do not appear anywhere in the company’s account.

Generally, the market cap will reflect the following about the company in addition to those things mentioned anywhere in this post:

a) Unlisted intangible assets like Mickey Mouse

b) Management Expertise

c) Growth prospects

d) Market share

e) Company’s reputation

f) Psychology of the market

A company’s market cap can fly up or decline based on perceptions that are beyond the company’s performance.

You can make money by identifying and buying into companies whose market cap is lower than their net assets. The other way, you can call this under-priced company/security.

Now you might question how to identify under-priced or over-priced securities?

The answer to your question is available in this article.

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